8 Common Myths About India’s National Pension System (NPS), Explained

The National Pension System (NPS) is a cornerstone of India’s pension architecture, designed to provide retirement security. Yet, several myths persist, causing confusion and potentially hindering individuals from making informed decisions.

This article applies to Central and State Government employees covered under NPS, as well as private-sector and self-employed subscribers.

Let’s demystify the most common ones.

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Myth 1: NPS is Only for Government Employees.

Fact: This is a historically rooted but outdated belief. While NPS was mandatorily launched for all new central government employees (except armed forces) in 2004, it was opened to all Indian citizens (General Public) on a voluntary basis in 2009. Today, any Indian citizen aged 18-70 can open an NPS account, including self-employed individuals and private sector workers.

Myth 2: You Get a Fixed, Guaranteed Pension Like the Old Pension Scheme (OPS).

Fact: NPS is a defined-contribution, market-linked scheme, not a defined-benefit scheme. The old OPS promised a fixed pension (typically 50% of last drawn salary). In contrast, NPS does not guarantee returns or a fixed pension amount. The corpus builds based on your contributions and market returns. At retirement, you use this corpus to buy an annuity (which provides a regular pension), and the amount depends on the corpus size and annuity rates at that time. The final pension is not a fixed percentage of your salary.

Myth 3: NPS Has Very Poor Returns.

Fact: NPS offers a mix of asset classes (Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investment Funds (A)). Returns are market-linked and vary.

The equity component (up to 75% for subscribers below 50) has the potential for higher long-term growth compared to traditional fixed-income products. Over long horizons (15+ years), NPS has delivered competitive, inflation-beating returns for many subscribers.

It’s important to note that returns vary across pension fund managers and asset allocation choices, and performance should be viewed over full market cycles rather than short periods.

Myth 4: You Cannot Withdraw Any Money Before Retirement.

Fact: Partial withdrawals are permitted under specific conditions.

You can withdraw up to 25% of your own contributions (not the total corpus, which includes employer contribution and returns) for specific purposes like higher education, marriage of children, purchase/construction of a house, or treatment of critical illnesses. This is allowed after being in the scheme for at least three years.

Additionally, upon reaching 60, at least 40% of the corpus must be used to purchase an annuity; up to 60% can be withdrawn as a tax-free lump sum.

Myth 5: The Entire Pension Corpus is Taxable at Withdrawal.

Fact: The tax treatment of NPS is uniquely beneficial. As per current laws:

• At maturity (age 60): Up to 60% of the corpus can be withdrawn as a lump sum, and it is completely tax-free.
• The remaining at least 40% must be used to purchase an annuity. The annuity income you receive is taxable as per your income tax slab in the year of receipt.
• On premature exit (after 10 years): You can withdraw up to 20% of the corpus as a tax-free lump sum and must use at least 80% to buy an annuity.

Myth 6: NPS is Illiquid and Inflexible.

Fact: NPS offers significant flexibility. You can:

• Choose your own asset allocation and pension fund manager.
• Change your fund manager and asset allocation twice a year.
• Actively manage your allocation (“Active Choice”) or leave it to a lifecycle-based auto-mode (“Auto Choice”).
• Make voluntary contributions anytime to your Tier I account and enjoy the same tax benefits.

Myth 7: The Annuity Purchase is a Bad Deal; You Lose Your Corpus.

Fact: This misunderstands the purpose of an annuity. An annuity is an insurance product that provides a guaranteed regular income for life, protecting you from outliving your savings.

The corpus used to buy the annuity is paid back to you as a steady pension. It is a longevity risk-management tool, not a loss. While annuity returns may appear modest compared to market-linked investments, their core value lies in providing certainty and lifelong income.

You can choose from various annuity types from different providers.

Myth 8: NPS and Atal Pension Yojana (APY) are the Same.

Fact: They are different schemes under the same pension regulatory architecture.

• NPS is focused on all citizens with flexible contributions and market-linked returns.
• APY is a focused, guaranteed pension scheme primarily for the unorganized sector, where the government co-contributes for eligible subscribers, and the pension amount is fixed and pre-defined.

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Making an Informed NPS Decision

The NPS is a powerful, flexible, and tax-efficient tool for building a retirement corpus. It is best viewed not as a replacement for all retirement planning, but as a disciplined core pension layer within a broader strategy.

The key is to understand its market-linked nature, long-term horizon, and the structure of lump-sum and annuity benefits. Dispelling these myths allows individuals to evaluate NPS objectively.

Always consult a certified financial planner for advice tailored to your specific situation.